It is unfortunately common for really profitable businesses to go bust because they have a poor cash flow model or because they don’t collect the debts due to them.
This is not just a case of ‘not collecting payment’ though. A good business plan will have cash flow at its core and the application of suitable expertise right at the start can be of enormous value. Deposits, pro forma invoices and staged (interim) payments can all help in limiting the challenge of debt collecting.
Collecting payment and getting cash to flow is about discipline and routine:
- Make sure payment terms are explicit when agreeing or acknowledging the customer’s order.
- Set credit limits which reflect the customers’ creditworthiness and do not allow debts to increase beyond that level.
- Make sure the invoices go out as soon as the service or product is delivered and has clear amounts and due date on it.
- Ensure all customer queries are dealt with by return.
- Ensure there is a routine to follow up very shortly after the debt becomes due.
- Design and implement, with discipline, an escalation procedure that sends the customer reminders of increasing import.
- Ensure you have a joined up approach. Don’t allow a customer to incur more debt whilst overdue payments remain.
- As the business is created, develop a relationship with an external debt collection agency. Take advice on best practice that will allow them the best chance of collecting any bad debts and follow this procedure.
In the small business and family owned business world, creditworthiness may appear poor because the shareholders extract money aggressively, in this case look at the creditors versus revenue ration to determine strength.
Thoughts on collecting payment – Yorkshire Powerhouse
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